Shares in AWG jumped more than 11 percent on Thursday after the water company said it had received an approach that could lead to an offer being made for the 2.2 billion pound firm.
A source familiar with the matter said a consortium of financial investors made the approach to the company, which runs Anglian Water in eastern England, an area with a population of around 5.5 million.
There can be no certainty that any offer will be made, AWG said.
UK regulations make it very difficult for companies that already own water assets to buy another water company, which leaves the door open for financial investors attracted by water companies' stable cashflow.
The stock was up 11.2 percent at 1,514 pence by 9:20 a.m., valuing the company around 2.16 billion pounds.
Several financial investors are also competing for Thames Water, which provides water and sewerage services in London and is being sold by German utility RWE AG for about 7 billion pounds.
Terra Firma Capital Partners, a consortium of UBS and the Qatar government and another being formed by Australia's Macquarie Bank Ltd are set to submit second round bids for Thames on October 10, said sources familiar with the matter.
Shares in other water companies also rose, with Kelda Group Plc up 4.3 percent, United Utilities Plc up 3.2 percent, Severn Trent Plc up 3 percent, Pennon up 4 percent and Northumbrian Water up 5.1 percent.
In May, AWG said full year profits had more than tripled, helped by larger bills for its customers, and promised its shareholders bigger returns for the next four years.
(Additional reporting by Mike Elliott)